How Does the Property Tax Deduction Work?

The property tax deduction is a federal tax benefit allowing homeowners to reduce their taxable income based on real estate taxes paid to state and local governments. This benefit is a deduction, not a credit, which means it reduces the amount of income subject to tax rather than directly lowering the tax owed.

Determining Your Eligibility to Deduct

To deduct property taxes, you must be the legal owner of the property and have paid the taxes either directly to the taxing authority or through an escrow account. If you purchase a property mid-year, the taxes are prorated at closing, and your settlement statement details the amount you are considered to have paid from the date of sale.

The ability to deduct property taxes hinges on the decision to itemize deductions rather than taking the standard deduction. The standard deduction is a fixed dollar amount that taxpayers can subtract from their income, with the amount varying by filing status. For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for those married filing jointly.

You should only itemize if your total itemized deductions exceed your available standard deduction. To determine this, you must add up all potential itemized deductions, which include property taxes, home mortgage interest, charitable contributions, and certain medical expenses. If this total is greater than the standard deduction, itemizing will result in a lower tax bill.

For example, consider a married couple with $8,000 in property taxes and $15,000 in mortgage interest. Their total itemized deductions would be $23,000. Since this is less than their $29,200 standard deduction, they would be better off not itemizing and therefore could not deduct their property taxes.

Identifying Deductible Property Taxes

Deductible property taxes are those levied by a state or local government on the value of real property you own, such as a primary residence, vacation home, or parcel of land. The tax must be assessed uniformly across similar properties in the community and be used for general public welfare purposes.

Many charges that appear on a tax bill are not deductible as property taxes because they are payments for specific services or benefits. These non-deductible payments include:

• Assessments for local benefits like new streets or sidewalks, which increase your property’s value
• Fees for services such as water, sewer, or trash collection
• Homeowners association (HOA) or condominium association fees
• Transfer taxes or other fees paid when buying a home

These costs are often added to the home’s cost basis rather than deducted. If you pay delinquent taxes owed by the seller when you purchase a home, that payment is also treated as part of your cost basis and is not a deductible tax.

Calculating the State and Local Tax (SALT) Deduction

Property taxes are not claimed as a standalone item but are bundled with other taxes under the state and local tax (SALT) deduction. When calculating this, you must first choose to include either your state and local income taxes or your state and local general sales taxes for the year. You then add your paid real property taxes to whichever of those two amounts you select.

The total SALT deduction is capped at $10,000 per household per year ($5,000 for those married filing separately). This cap applies to the combined total of your property, income, and sales taxes, regardless of how much you actually paid.

This limitation particularly affects taxpayers in areas with high property values or state income tax rates. For instance, if you pay $9,000 in state income taxes and $7,000 in property taxes, your total is $16,000, but you can only deduct $10,000. This cap is set to expire at the end of 2025 unless extended by Congress.

How to Claim the Deduction on Your Tax Return

You claim the property tax deduction on Schedule A (Form 1040), Itemized Deductions, which is filed with your main tax return. Your total state and local taxes, including property taxes, are reported on line 5 of Schedule A. The form guides you through combining your property taxes with either state income or sales taxes and then applying the $10,000 limitation.

To find the exact amount of property taxes you paid, you can refer to your property tax bills or Form 1098, Mortgage Interest Statement. If you pay taxes through an escrow account, Form 1098 shows the amount your lender paid on your behalf. It is important to use the amount actually paid out of escrow, not the total you paid into the account during the year.

You should keep copies of all relevant documents that support your deduction. This includes your annual property tax bills, canceled checks, and year-end mortgage statements. Retaining this documentation is important in the event the IRS has questions about your tax return or selects it for an audit.